California’s New Tax Credit

Starting this year, California tax filers with very low incomes from wages are now able to claim a tax credit that builds on the federal Earned Income Tax Credit (EITC). Californians without dependent children can claim the credit if their wages are less than about $7,000, and those with children can claim it if their wages are less than about $14,000.

California joins 25 other states that have their own EITCs. Since California’s credit is brand new, we do not yet know who will claim it. However, our research enables us to characterize the population of those likely eligible for the credit. These estimates are based on family characteristics and incomes reported for 2013.

About 3 million tax filers in California are eligible to claim the federal credit on behalf of themselves and their families. We project that roughly 600,000 filers will be eligible for the California EITC—or about a fifth of those eligible for the federal EITC. If we broaden the scope to include both filers and their family members who will also benefit from the credit, the number of Californians affected by the federal EITC increases to nearly 10 million and by the state credit to 2 million.

Single filers with dependents can generally claim the largest credit. Among those in this group who are eligible for the state EITC, we calculate that the state EITC amount is $932 on average and the federal EITC amount is $2,579, for a combined total of $3,511. This amounts to a 58% boost in earnings on average—20% from the state credit and 38% due to the federal credit. While these filers are working a substantial number of hours (29 hours per week on average), only 37% report working year round (48 weeks or more).

In contrast, single filers with dependents who are eligible only for the federal EITC because their earnings are too high to claim the state EITC see about a 16% increase in income. Compared to those who can claim the state EITC, those eligible only for the federal EITC typically work full time (40 hours a week on average) and year round (83% worked 48 weeks or more).

We know from the research literature that the federal EITC boosts family incomes both directly and indirectly by encouraging work. While it is still too early to assess the full impact of the new California EITC, this early glimpse suggests that the direct effects of the state EITC will be large, at least among a key group of filers eligible to claim the credit.